The tax stance taken by the IRS means taxes must be paid when you use Bitcoin. As a result, taxes factor into Bitcoin’s market price-but it doesn’t necessarily contribute to its volatility unless the tax regulations change often and cause investor concerns. Rumors about regulations tend to impact Bitcoin’s price in the short term, but the significance of the impacts is still being analyzed and debated. Rumors of the push to end mining in the country had caused prices to drop previously-but following the release of the committee meeting in May, Bitcoin’s price dropped through August 2021 to around $29,700 as miners scrambled to relocate. Supply and demand influence the prices of most commodities more than any other factor. Investors jumped at the chance to gain exposure to a cryptocurrency on an official exchange, causing a price jump to more than $69,000. Other investors would begin to sell, and prices would plummet before anyone with more than $50,000 in coins could sell them all off, leading to large and rapid losses. Media outlets, influencers, opinionated industry moguls, and well-known cryptocurrency fans create investor concerns, leading to price fluctuations. When media outlets announced Proshare’s introduction of its Bitcoin Strategy ETF (exchange-traded fund) in late October 2021, Bitcoin’s price skyrocketed over the next few weeks.
However, most of this media attention and publicity serves to influence Bitcoin’s price to benefit the people who hold large numbers of coins. Government agency views of cryptocurrency can also affect Bitcoin’s price. You can buy Bitcoin on government-approved cryptocurrency exchanges like Coinbase. Is Bitcoin Safe to Buy? The IRS also considers Bitcoin a capital asset if it’s used as an investment instrument. For example, the Internal Revenue Service (IRS) considers Bitcoin a convertible virtual currency because you can convert it to cash. It’s not uncommon to hear an opinion from someone heavily invested in Bitcoin stating that the currency will soon be worth hundreds of thousands. It is unclear how Bitcoin whales-investors with BTC holdings of a minimum of 10 million-would liquidate their significant positions into fiat currency without affecting Bitcoin’s market price. As big financial players compete for ownership in an environment of dwindling supply, Bitcoin’s price will likely fluctuate in response to any actions they take. It’s rare to watch cryptocurrency news and not see an investor or fan’s opinion of how high Bitcoin’s price will get. Emerging technologies like decentralized finance and the metaverse may reveal Bitcoin’s market staying power, but it is still speculation whether Bitcoin will have any value or utility in these systems.
Bitcoin volatility is also partly driven by the varying belief in its utility as a store of value and method of value transfer. A store of value is an asset’s function that allows it to maintain value in the future with some degree of predictability. Additionally, if you mine a Bitcoin, you are required to report it as income based on the coin’s market value on the date you receive it. Bitcoin’s market value is primarily affected by how many coins are in circulation and how much people are willing to pay. Many investors believe that Bitcoin will retain its value and continue growing, using it as a hedge against inflation and an alternative to traditional value stores like gold or other metals. As an asset adopted quickly by investors and traders, speculation about price movements plays a critical part in Bitcoin’s value at any given moment. Long-term, wealthier investors hold their Bitcoins, preventing those with fewer assets from gaining exposure. Investors with thousands of Bitcoin may not be able to liquidate their assets fast enough to prevent enormous losses.
After the hype died down and investors realized the ETF was linked to Bitcoin through futures contracts traded on the commodities market, prices dropped back down around $50,000. This means that prices will continue to change as investors, users, and governments work through the initial growing pains and concerns until prices stabilize-if a stable point can be reached. All of these factors work together to create price volatility. Bitcoin volatility is also driven, to an extent, by these investors. If the whales were to begin selling their Bitcoin holdings suddenly, prices would plummet as other investors panicked as well. If Bitcoin prices continue to hover around $50,000, a larger investor could only liquidate one coin per day. Most exchanges have limits on the amount that can be liquidated in one day, in the range of around $50,000. Unfortunately, it is unknown how high or low the cryptocurrency’s price will go. Bitcoin has only been around for a short time-it is still in the price discovery phase. If you’re looking to use Bitcoin to preserve capital or grow your assets, its price is highly volatile-there is no guarantee that you will see any returns; you’re just as likely to lose everything you invest as you are to make any gains.
